Portfolio optimization based on downside risk: a mean-semivariance efficient frontier from Dow Jones blue chips

To create efficient funds appealing to a sector of bank clients, the objective of minimizing downside risk is relevant to managers of funds offered by the banks. In this paper, a case focusing on this objective is developed. More precisely, the scope and purpose of the paper is to apply the mean-sem...

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Bibliographic Details
Published in:Annals of operations research 2013-05, Vol.205 (1), p.189-201
Main Authors: Pla-Santamaria, D., Bravo, M.
Format: Article
Language:English
Subjects:
Bank management
Banks
Business and Management
Combinatorics
Equity funds
Focusing
Gain
Investors
Lotteries
Mathematical economics
Mathematical optimization
Operations research
Operations Research/Decision Theory
Optimization
Portfolio management
Raw materials
Risk
Studies
Theory of Computation
Time series
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Summary:To create efficient funds appealing to a sector of bank clients, the objective of minimizing downside risk is relevant to managers of funds offered by the banks. In this paper, a case focusing on this objective is developed. More precisely, the scope and purpose of the paper is to apply the mean-semivariance efficient frontier model, which is a recent approach to portfolio selection of stocks when the investor is especially interested in the constrained minimization of downside risk measured by the portfolio semivariance. Concerning the opportunity set and observation period, the mean-semivariance efficient frontier model is applied to an actual case of portfolio choice from Dow Jones stocks with daily prices observed over the period 2005–2009. From these daily prices, time series of returns (capital gains weekly computed) are obtained as a piece of basic information. Diversification constraints are established so that each portfolio weight cannot exceed 5 per cent. The results show significant differences between the portfolios obtained by mean-semivariance efficient frontier model and those portfolios of equal expected returns obtained by classical Markowitz mean-variance efficient frontier model. Precise comparisons between them are made, leading to the conclusion that the results are consistent with the objective of reflecting downside risk.
ISSN:0254-5330
1572-9338
DOI:10.1007/s10479-012-1243-x